At what point do we market time?

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HomerJ
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Re: At what point do we market time?

Post by HomerJ » Wed Jun 08, 2016 9:51 am

Dandy wrote:
Before succumbing to the lure of market timing, listen to these experts:
Or you could listen to Mr. Bogle who also said when the market is extremely overvalued, a rare event, you should consider reducing your equity allocation say from 65% to 50%. During the high valuations around the year 2000 he reduced his allocation from 75 or 80% to 25% partly due to health concerns and partly due to valuations. I think a PE of 50 would be considered "extreme" not to mention a PE of 150.

Stay the course makes sense most of the time for most people but even Mr. Bogle, who probably coined that phrase, knows there are exceptions to be considered in extreme/unusual times. He is often more flexible than many of his devoted followers.
"Staying the course" through the 2000 dot-com bubble paid off just fine. It crashed, then came back up. So far, we don't have to avoid the crashes to make a good return from the stock market... The historical 9%-10% return INCLUDES all the bear markets.

Do nothing for the past 100 years, and you got 9%... Do something, and you might have gotten more, but you were also more likely to have gotten less.

When did Mr. Bogle get back in by the way? Did he ever change back to 80% stocks? If he never went back to 80% stocks, that changes the story significantly.

KlangFool
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Re: At what point do we market time?

Post by KlangFool » Wed Jun 08, 2016 10:00 am

Folks,

IMHO, Bogleheads stand for Buy, Hold, and Rebalance.

P/E is around 25 now. If the P/E goes up to 150, the stock market had increased 6 times. For many Bogledheads, the followings should happened:

A) Rebalancing long before that.

B) AA may had changed because some people had won the game.

OP,

I made money from Real Estate Bubble and Bust. I was investing in REIT Index Fund. When the fund went up more than 25%, I sold and locked in the gain. This was based on my 5/25 band rebalancing rule. The subsequent bust did not hurt me.

So, WHY are you worrying about P/E going up to 150? What does your IPS tell you? Do you have one?

KlangFool

Dandy
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Re: At what point do we market time?

Post by Dandy » Wed Jun 08, 2016 10:18 am

Staying the course" through the 2000 dot-com bubble paid off just fine. It crashed, then came back up. So far, we don't have to avoid the crashes to make a good return from the stock market... The historical 9%-10% return INCLUDES all the bear markets.

I stayed the course in the 2000 dot com bubble and also did fine I was in the accumulation phase. In retirement with almost zero human capital I would have been more conservative. Equities usually do well over the long term -- when you retire your term may be shorter than the equity long term recovery.


Do nothing for the past 100 years, and you got 9%... Do something, and you might have gotten more, but you were also more likely to have gotten less.

As you know the past isn't the absolute guide to the future - Not many "experts" are as confident about equities returning 9% over the medium including Mr. Bogle. The medium term might be my full retirement years.


When did Mr. Bogle get back in by the way? Did he ever change back to 80% stocks? If he never went back to 80% stocks, that changes the story significantly.

Don't know and don't see why that is important - the point was when Mr. Bogle feels the equity market is extremely overvalued he feels that it is prudent to cut back significantly on your equity allocation - that is significantly different than the strict application of stay the course mantra often cited by him -- and many on this board. I think some stay the course devotees are comfortable with holding on to stay the course because it makes sense most of the time and requires no critical thinking in extreme times -- it becomes something to hold on to when times are difficult and a hard decision might have to be made. It is easier to have a set it and forget it approach especially if so many "experts" seem to agree.

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HomerJ
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Re: At what point do we market time?

Post by HomerJ » Wed Jun 08, 2016 12:47 pm

Dandy wrote:Staying the course" through the 2000 dot-com bubble paid off just fine. It crashed, then came back up. So far, we don't have to avoid the crashes to make a good return from the stock market... The historical 9%-10% return INCLUDES all the bear markets.

I stayed the course in the 2000 dot com bubble and also did fine I was in the accumulation phase. In retirement with almost zero human capital I would have been more conservative. Equities usually do well over the long term -- when you retire your term may be shorter than the equity long term recovery.
When you are close to or in retirement, you should be more conservative in any case. It doesn't matter what valuations are. There is always risk... Even if risk is lower when valuations are lower, the risk never goes to zero. I would never be 80/20 in retirement, no matter what the valuations are.
Do nothing for the past 100 years, and you got 9%... Do something, and you might have gotten more, but you were also more likely to have gotten less.

As you know the past isn't the absolute guide to the future - Not many "experts" are as confident about equities returning 9% over the medium including Mr. Bogle. The medium term might be my full retirement years.
I'm not saying we're guaranteed to get 9% going forward... I'm saying that you don't have to avoid the crashes to get the long-term returns from the stock market.
When did Mr. Bogle get back in by the way? Did he ever change back to 80% stocks? If he never went back to 80% stocks, that changes the story significantly.

Don't know and don't see why that is important - the point was when Mr. Bogle feels the equity market is extremely overvalued he feels that it is prudent to cut back significantly on your equity allocation - that is significantly different than the strict application of stay the course mantra often cited by him -- and many on this board. I think some stay the course devotees are comfortable with holding on to stay the course because it makes sense most of the time and requires no critical thinking in extreme times -- it becomes something to hold on to when times are difficult and a hard decision might have to be made. It is easier to have a set it and forget it approach especially if so many "experts" seem to agree.
It matters somewhat if he never went back to 80%, because then he wasn't completely market-timing.. He just realized that at his age and wealth, it was not wise, nor needed, to be 80% in stocks... If he permanently lowered his AA, that's a very different thing than if he "market-timed", jumping out and back in based on valuations.

BUT... I will concede to you that we may not be able to claim that Mr. Bogle is a good role model when it comes to "staying the course", since he failed to do so. It should be noted that the super-wealthy ARE different from the rest of us... They can take out-size risks, that may not apply to our situations. People like us would not normally be 80/20 in our 70s like he was. It's different if the 20% equals millions.

Note for fun that if he had left his money at 80% stocks he'd be much more wealthy today.

But, you never know, the next crash may last for 20 years... So I remain very conservative as I come close to retirement, and even if valuations were much lower, I'd remain conservative.
Last edited by HomerJ on Wed Jun 08, 2016 1:10 pm, edited 2 times in total.

qwertyjazz
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Re: At what point do we market time?

Post by qwertyjazz » Wed Jun 08, 2016 12:58 pm

Buy and hold in the US market has worked very well for the past 100 years - but I think the phrase US market has to be mentioned - 2008 turned out fine but Prof Samuelson then warned about investing when Rome is burning - it turned out fine but it might not have - so is there a PE ratio where you believe the fundemental nature of the market has changed? It might not happen for 30-40 years or longer but PE ratio of 150 does not make sense to me except in some weird winner take all market of mostly start up companies who reach market and then have a short half life - or is there another scenario?

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nedsaid
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Re: At what point do we market time?

Post by nedsaid » Wed Jun 08, 2016 1:01 pm

I don't believe in market timing but at the same time I say that investors have to pay attention to valuations. A disciplined rebalancing program will take care of much of this. But there are situations of euphoria and "trees grow to the sky" thinking where it gets to be prudent to cut back on your stocks. John Bogle has talked about paring back maybe 15% of your total portfolio, so if you were 65% in stocks and were concerned about market euphoria, you could go to 50% in stocks. I don't believe in being "all out" even when valuations look crazy.

It is better to "panic" when the market is reaching new highs that selling at the bottom of the market and locking in losses.

By the way, we are nowhere near euphoria. I see negative article after negative article in the financial press and this alone tells me this is not 1999 or early 2000. Forward market P/E's are about 18-19 now as compared to the low thirties in 1999/early 2000.

Mr. Bogle did sell most of his stocks prior to the 2000 crash. He was concerned about the high valuation of stocks then and said that bonds were the "steal of the century." But keep in mind, he was also having serious health issues at the time and that was another big consideration. A good lesson that these decisions need to be made in the context of our personal circumstances.
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Phineas J. Whoopee
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Re: At what point do we market time?

Post by Phineas J. Whoopee » Wed Jun 08, 2016 2:31 pm

KlangFool wrote:OP,
I adjust my AA based on significant gain of my portfolio size. So, way before the P/E hit 150, I would had won my game. ...
Even if the P/E change was based on an earnings drop, rather than a price increase?
PJW

KlangFool
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Re: At what point do we market time?

Post by KlangFool » Wed Jun 08, 2016 2:36 pm

Phineas J. Whoopee wrote:
KlangFool wrote:OP,
I adjust my AA based on significant gain of my portfolio size. So, way before the P/E hit 150, I would had won my game. ...
Even if the P/E change was based on an earnings drop, rather than a price increase?
PJW
Phineas J. Whoopee,

You are right!

Correction.

<<I adjust my AA based on significant gain of my portfolio size. So, way before the P/E hit 150, if that resulted in significant gain in my portfolio size, I would had won my game.>>

Thanks.

KlangFool

MIretired
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Re: At what point do we market time?

Post by MIretired » Wed Jun 08, 2016 3:25 pm

Anybody read the link to 'yale.edu' in this thread? :
viewtopic.php?f=10&t=192588
http://www.econ.yale.edu/~shiller/pubs/p1183.pdf

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Re: At what point do we market time?

Post by qwertyjazz » Wed Jun 08, 2016 3:49 pm

That is why I do not understand the statement $100 invested in the stock market in 100 years would be worth some ridiculous number - only 49 companies survived to be studied there - so you need a mechanism of buying new companies like indexes - it also means the stock market recreates itself every so often with some of the logic possibly changing

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JoMoney
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Re: At what point do we market time?

Post by JoMoney » Wed Jun 08, 2016 3:59 pm

qwertyjazz wrote:That is why I do not understand the statement $100 invested in the stock market in 100 years would be worth some ridiculous number - only 49 companies survived to be studied there - so you need a mechanism of buying new companies like indexes - it also means the stock market recreates itself every so often with some of the logic possibly changing
It depends on what you mean by "survived". A lot of companies were merged or split into other companies over time. The LEXCX "Corporate Leaders Trust" fund is an interesting case to look at.
http://www.wsj.com/articles/SB100014240 ... 1145378546
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Re: Polaroid

Post by itstoomuch » Wed Jun 08, 2016 4:03 pm

HomerJ wrote:
itstoomuch wrote:My older bro, "stayed-the-course" his losses amount to a few 7 figures, or 8 figures, 2007-2009.
Your older bro had most of his money in one stock/company.. the one he worked for.

If he had his money in a total stock market index fund, he would have gained it all back and doubled it by "staying the course".
He did have quite a sum in Indexes. His big company was then a big component of DJI and SP. His company never recovered.
Unfortunately he had a sequence-of-events that he could not extradite himself from. He had a monitored portfolio.


Moral: Market time your company's stock if possible or minimally have scheduled sells. Don't get caught in Sequence-of- Events. Exercise your stock options early and frequently.
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sixtyforty
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Re: At what point do we market time?

Post by sixtyforty » Wed Jun 08, 2016 4:31 pm

"Timing the market" is such an overused term. It means different things to different people. No one can time the turns of the market. You would get whipsawed into oblivion and little to show for it, except a cardboard box to live in :) The better question is "Are there any strategies one could follow to avoid the depths of a bear market?" I think there is. I do know, that most people overestimate their ability to withstand a bear market. When your portfolio is evaporating and the dow futures are down -500 and everyone is saying "we've never seen this before" can be quite emotionally draining. Most people are not ready for it. "Stay the Course" is the best approach, provided you have the right AA for your "risk tolerance". IMO, the vast majority of people that did "stay the course" through previous bear markets was not because of an IPS, but rather they were working so hard they had no time to look at their portfolio (Bogle's advice BTW ! ).

What I like to do is assume the S&P 500 drops -50% and stays there for 1 year. What would your portfolio look like ? If you're AA 50/50 you may only experience a -25% drop in your portfolio (assuming bonds don't go down). Maybe that'a acceptable, maybe not. A 100% AA in stocks, would yield an evaporation of -50% in the portfolio. $100K becomes $50K, requiring a 100% return to get back to breakeven.

As far as the OP's question, I never found valuation to work anywhere. The other problem is assume you do sell, when would you get back into equities again ? Many fail to see both sides. Getting out is one thing, knowing when to get back in is very difficult. For those that purport they sold and avoided the bear market neglect to also tell you they missed most of the raging bull.

So do valuations work in timing the market ? I don't think so.
Can you time the turns in the market ? Sure you can, just pick the color of the cardboard box you want to live in :)
Can you avoid a bear market ? With the right AA for your risk tolerance and taking a hiatus from looking at your portfolio, I believe so.
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Re: At what point do we market time?

Post by Grogs » Wed Jun 08, 2016 8:33 pm

KlangFool wrote:OP,

I adjust my AA based on significant gain of my portfolio size. So, way before the P/E hit 150, I would had won my game. I would had adjusted my AA to lock in the gain. Then, it won't matter anymore as to what will happen next. This is part of my IPS. So, this is not market timing.

KlangFool
Basing my AA on portfolio size makes a lot more sense to me than traditional age-based allocations, especially because I arrived to the investing party somewhat later in life. I have a basic IPS that says my AA will be 80% stocks, minus 1% for each multiple of basic living expenses in the portfolio. So if I have 10X expenses in my portfolio, my AA would be 70/30. Hopefully by retirement, I'll be at 30X for a 50/50 AA.

One thing I've pondered is what happens when the portfolio size shrinks due to a big drop in stock prices. For example, say I have 10X expenses at 70/30, and then stocks drop 50%. Then I would only have 6.5X expenses. One possibility might be to increase the AA back to 73/27. That would in effect be a bit of an overcorrection on rebalancing. My IPS also says that the maximum change in one year is 5%, so it would only be a small tactical shift. It remains to be seen whether I would actually have the nerve to do it, but it at least sounds good on paper.

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Re: At what point do we market time?

Post by KlangFool » Wed Jun 08, 2016 8:43 pm

Grogs wrote:
KlangFool wrote:OP,

I adjust my AA based on significant gain of my portfolio size. So, way before the P/E hit 150, I would had won my game. I would had adjusted my AA to lock in the gain. Then, it won't matter anymore as to what will happen next. This is part of my IPS. So, this is not market timing.

KlangFool
Basing my AA on portfolio size makes a lot more sense to me than traditional age-based allocations, especially because I arrived to the investing party somewhat later in life. I have a basic IPS that says my AA will be 80% stocks, minus 1% for each multiple of basic living expenses in the portfolio. So if I have 10X expenses in my portfolio, my AA would be 70/30. Hopefully by retirement, I'll be at 30X for a 50/50 AA.

One thing I've pondered is what happens when the portfolio size shrinks due to a big drop in stock prices. For example, say I have 10X expenses at 70/30, and then stocks drop 50%. Then I would only have 6.5X expenses. One possibility might be to increase the AA back to 73/27. That would in effect be a bit of an overcorrection on rebalancing. My IPS also says that the maximum change in one year is 5%, so it would only be a small tactical shift. It remains to be seen whether I would actually have the nerve to do it, but it at least sounds good on paper.
Grogs,

<< I have a basic IPS that says my AA will be 80% stocks, minus 1% for each multiple of basic living expenses in the portfolio. So if I have 10X expenses in my portfolio, my AA would be 70/30. Hopefully by retirement, I'll be at 30X for a 50/50 AA.>>

IMHO, AA adjustment need to be done in a time period greater than your usual annual balancing.

<< One thing I've pondered is what happens when the portfolio size shrinks due to a big drop in stock prices. For example, say I have 10X expenses at 70/30, and then stocks drop 50%. Then I would only have 6.5X expenses. >>

1) I do not increase my stock allocation in my AA. It only goes one direction.

2) The situation that you shown is why I do not adjust my AA at small multiple of annual expense except when it reaches something like 20X annual expense.

My suggestion is to

A) Do not adjust AA at all in the beginning

B) After crossing a threshold like 20X annual expenses, then adjust the AA at 2 X annual expense.

KlangFool

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Re: At what point do we market time?

Post by qwertyjazz » Wed Jun 08, 2016 9:04 pm

Grogs
In my limited understanding, the literature on AA tends to minimize the income effect on risk utility curves which you are highlighting.
The problem is too much focus on it can lead to a death spiral in a down market if you keep shifting into bonds. If you believe in some version if mean reversion if only stocks will at least go back up again, by focusing on the incone effect you will sell low and not recover.
The other side of the coin is you are poorer when it occurs and the stock market might not come up fast enough. Also the market might be efficient and properly priced.
Your solution seems to be a trade off of those two factors. I might try something like it too.

Thank you
QJ

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Re: At what point do we market time?

Post by MindBogler » Wed Jun 08, 2016 9:16 pm

If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.

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Re: At what point do we market time?

Post by itstoomuch » Wed Jun 08, 2016 10:06 pm

kosomoto wrote:Is there a point where it would simply make sense to time the market? [...snip]

And then if we do decide to time the market, at what point is the cutoff? [...snip]]
@kosomoto;
Depends.

BTW, How old are you? How are your retirement savings? Are you any where near retirement? What's your risk tolerance? Do you have a pension, annuity? These questions help my "Depends" answer.

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HomerJ
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Re: At what point do we market time?

Post by HomerJ » Wed Jun 08, 2016 10:35 pm

MindBogler wrote:If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.
When PE10 went over 25 in 1996, how many sigmas was that? (at the time, PE10 had never been over 25 before except in 1929, right before the Great Depression). Use data from 1900-1996 only.

1996 wasn't a great time to sell, yet valuations were indeed at an extreme at the time.

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snowshoes
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Re: At what point do we market time?

Post by snowshoes » Tue Jun 28, 2016 3:52 am

I quote a wise old bird:" Let us fallback on the principle that when any rule, policy, guidline or formula becomes a substitute for rational thought rather than an aid to thinking, its then dangerous and should be discarded". At that point perhaps we might market time or rebalance if we have the appropriate time in the markets. jmo

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Re: Polaroid

Post by lazydavid » Tue Jun 28, 2016 7:45 am

itstoomuch wrote:Moral: Market time your company's stock if possible or minimally have scheduled sells. Don't get caught in Sequence-of- Events. Exercise your stock options early and frequently.
Truth. I have great confidence in the future of my employer. We're in a high-margin, run-rate business, with 40% of gross annual revenue in cash. But both me and my wife work here, I don't need exposure to additional company risk. So my annual RSU vestments are set to sell-to-cover taxes, with the remainder automatically transferring into my Wealthfront account (where it gets sold and broken up according to my AA/Risk Profile).

I typically do the same with my quarterly ESPP. But given that this quarter's buy is this Thursday, I might let it ride for a week or two before selling. Edit: damn, the stock price has already recovered half of what it lost, after less than two hours of trading on Tuesday. Back to plan A and selling the day I get it. :)
Last edited by lazydavid on Tue Jun 28, 2016 9:52 am, edited 1 time in total.

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Re: At what point do we market time?

Post by Rodc » Tue Jun 28, 2016 7:54 am

kosomoto wrote:Is there a point where it would simply make sense to time the market? For example, if US stocks are trading at a PE of 150 (and have been at a high PE of 150+ for over a year, slowly declining) and bonds are yielding 8%, with inflation at 3%, would it not make absolute sense to sell the stocks and buy bonds?

And then if we do decide to time the market, at what point is the cutoff? Currently interest rates are extremely low, in fact the upside is easy to calculate, if interest rates go lower then bond funds will increase in value. But they can't go much lower than negative 1 percent. So the gain is essentially capped and the downside is fairly large given how much higher interest rates can go. So at this point bonds look like a terrible investment? There are low volatility stock funds that could withstand a market crash pretty handily, so why not substitute those?
You have to first carefully define what the words "market time" mean to you. These are in general very fuzzy terms so most threads that look like they are debating the value or risk of market timing are mostly arguing the definition.

If one uses a typical rebalancing band strategy or even just a yearly rebalancing strategy, they will likely have been selling stocks to buy bonds at least semi-regulary as the PE climbed from 20 to 25 to 30 to ... 150. Call it market timing if you want, but IMHO if so it is a very mild form.

If you want to use a more aggressive and active form of market timing as you note there are issues of when to start (is this a short term dip and reversion to the mean will happen very soon, or is this something longer where momentum is your friend, or what?), when to end, how much to swing (just rebalance or massively shift your asset allocation?).

I do not know how to the later so I only do the former.

Which is best I do not know in advance.
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Re: At what point do we market time?

Post by TheTimeLord » Tue Jun 28, 2016 8:05 am

HomerJ wrote:
MindBogler wrote:If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.
When PE10 went over 25 in 1996, how many sigmas was that? (at the time, PE10 had never been over 25 before except in 1929, right before the Great Depression). Use data from 1900-1996 only.

1996 wasn't a great time to sell, yet valuations were indeed at an extreme at the time.
Looking at SPY if you have sold on roughly Nov. 1, 1996 and stayed out of equities with 100% bonds until Feb. 1, 2009 I think you would have been okay or Nov. 1, 1996 until Oct. 1, 2002.
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Re: At what point do we market time?

Post by Rodc » Tue Jun 28, 2016 8:33 am

TheTimeLord wrote:
HomerJ wrote:
MindBogler wrote:If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.
When PE10 went over 25 in 1996, how many sigmas was that? (at the time, PE10 had never been over 25 before except in 1929, right before the Great Depression). Use data from 1900-1996 only.

1996 wasn't a great time to sell, yet valuations were indeed at an extreme at the time.
Looking at SPY if you have sold on roughly Nov. 1, 1996 and stayed out of equities with 100% bonds until Feb. 1, 2009 I think you would have been okay or Nov. 1, 1996 until Oct. 1, 2002.
That is a very long time to stay the course as far as staying out of the market, especially given the huge rise from 1996 to 2000. I'm not sure many could have pulled it off.

That is one problem with backtestings - computers have much stronger nerves than humans and fewer pesky emotions. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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TheTimeLord
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Re: At what point do we market time?

Post by TheTimeLord » Tue Jun 28, 2016 8:50 am

Rodc wrote:
TheTimeLord wrote:
HomerJ wrote:
MindBogler wrote:If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.
When PE10 went over 25 in 1996, how many sigmas was that? (at the time, PE10 had never been over 25 before except in 1929, right before the Great Depression). Use data from 1900-1996 only.

1996 wasn't a great time to sell, yet valuations were indeed at an extreme at the time.
Looking at SPY if you have sold on roughly Nov. 1, 1996 and stayed out of equities with 100% bonds until Feb. 1, 2009 I think you would have been okay or Nov. 1, 1996 until Oct. 1, 2002.
That is a very long time to stay the course as far as staying out of the market, especially given the huge rise from 1996 to 2000. I'm not sure many could have pulled it off.

That is one problem with backtestings - computers have much stronger nerves than humans and fewer pesky emotions. :)
Quite true, but it also helps illustrate things can (and sometimes do) return to lows from bygone years. Another lesson is how long the market can maintain high/irrational/unwarranted valuations before adjusting. On the positive side you could look at Dec. 1, 1987 to 2000, a truly massive bull market that I think has very much shaped investor attitudes toward equities.

Personally, I don't consider what I do market timing, what I do or try to do is manage risk so I can maintain my hard earned nest egg. Basically, I try to remain very disciplined (with varying levels of success) so I don't find myself reaching for yield or return. My experience has taught me I get in trouble when I reach.
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MindBogler
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Re: At what point do we market time?

Post by MindBogler » Tue Jun 28, 2016 7:16 pm

HomerJ wrote:
MindBogler wrote:If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.
When PE10 went over 25 in 1996, how many sigmas was that? (at the time, PE10 had never been over 25 before except in 1929, right before the Great Depression). Use data from 1900-1996 only.

1996 wasn't a great time to sell, yet valuations were indeed at an extreme at the time.
PE at 25 was not a 2 or 3 sigma event. Without running precise numbers, I can tell you that a 2 sigma PE10 would be something on the order of >31. So yes, if we approach a 2 or 3 sigma, a PE of 40, I will begin de-risking my assets. I will sleep better at night in doing so. Bogle made a similar decision for the same reason. A buy and hold approach doesn't mean blind and hold to me.

Dandy
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Re: At what point do we market time?

Post by Dandy » Thu Jun 30, 2016 7:55 am

When you use the term market time or buckets it is like hitting a bee hive with a stick. :happy Sometimes there are beliefs that are held so sacred that it is very upsetting to even consider a change, however modest. I generally agree that tying to time the market and staying the course and rebalancing once in awhile via a predetermined trigger makes a lot of sense. People should be very cautious thinking they can think of some sort of edge.

Mr. Bogle is more flexible than many of his followers. e.g. he doesn't feel international equities are necessary and yet many of his followers feel differently and have large international equities in their portfolio and actively promote the 3 fund portfolio which includes them. I would guess Mr. Bogle wouldn't be a big fan of international bonds - but I don't have a specific quote in mind.

As far as market timing Mr. Bolgle is against it and says it often. Less publicized is he feeling that when the market is extremely overvalued, a rare occasion, that people should consider moving from say 65% equities to 50%. He himself moved his equity allocation from about 80% to 25%? somewhat due to health reasons but also due to the PE ratios that existed and the bond interest alternatives that existed just prior to the 2000 crash. (there are some interviews with him on youtube that cover this)

So to me that means when the situation is extreme, a rare event, you may actually have to eschew the stay the course/don't try to time the market advice and make other decisions. That is a dicey situation. You are kind of on your own. My best guess in that eventuality is to
err on the conservative/asset preservation side.

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HomerJ
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Re: At what point do we market time?

Post by HomerJ » Thu Jun 30, 2016 10:37 am

MindBogler wrote:
HomerJ wrote:
MindBogler wrote:If PE10 hits 40, I'll sell. When PE10 is at 2 or 3 sigma extremes it is more predictive and, in my opinion, actionable.
When PE10 went over 25 in 1996, how many sigmas was that? (at the time, PE10 had never been over 25 before except in 1929, right before the Great Depression). Use data from 1900-1996 only.

1996 wasn't a great time to sell, yet valuations were indeed at an extreme at the time.
PE at 25 was not a 2 or 3 sigma event. Without running precise numbers, I can tell you that a 2 sigma PE10 would be something on the order of >31.
Again, are you using only data from 1900-1996? PE10 over 20 has been the norm since 1992. Basically, PE10 has been over 20 for 23 of the past 24 years.

Before that, every time PE10 got above 20, a crash soon followed. The only time PE10 had gotten over 25 in the past was 1929.

Believe me, anyone following PE10 in 1996, totally freaked out when it went over 25 in 1996. That was Great Depression numbers. It had only been seen once before. Schiller himself wrote a paper predicting 0% real returns going forward from the super high level in 1996. He was wrong.

PE10 has proven to be a terrible predicting tool. The last 25 years have been completely different from the previous 75. Who knows what the next 25 years will look like?

rbaldini
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Re: At what point do we market time?

Post by rbaldini » Thu Jun 30, 2016 10:48 am

In my very little experience, markets are hard to predict. But they're not *entirely* unpredictable: evidently valuations and long-term past trends provide some non-zero amount of information about the market. When these predictors change, it follows that a rational strategy would be to change one's investments accordingly.

"Accordingly" is the key word. The trick is that (1) the predictors change slowly over time and (2) they are pretty weak predictors in the first place. This means that any decision you make based on them should not produce any sudden or large swings in allocation. That would be overreaction.

I could imagine a person quantitatively tracking things like the last 10 years of returns and valuations, annually plugging those into a statistical model, deriving expected returns with volatility, and using that to then determine an optimal AA that fit their needs. SInce these predictors are weak and slow to change, this would probably only lead to very small annual changes in AA - a few % points up and down, depending; never "put all your money in bonds." It hardly feels like market timing, in that case.
Last edited by rbaldini on Thu Jun 30, 2016 10:48 am, edited 1 time in total.

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HomerJ
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Re: At what point do we market time?

Post by HomerJ » Thu Jun 30, 2016 10:48 am

Dandy wrote:So to me that means when the situation is extreme, a rare event
One should be very careful here.

There are a ton of "extreme, rare events" that turn out to be nothing in hindsight. Or turn out to be something, but just "staying the course" through the turmoil worked out fine too.

I would think the potential of the EU breaking up, the largest economy in the world, could easily be qualified as an "extreme, rare event".

Should someone at 80% stocks have gone to 20% stocks last Friday?

Dandy
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Re: At what point do we market time?

Post by Dandy » Thu Jun 30, 2016 12:04 pm

Should someone at 80% stocks have gone to 20% stocks last Friday?
I assume you are referring to Mr. Bogle. First, my buy on RBDs are modest and within my already established equity allocation bands. After 2 such buys in a row I stop and let normal rebalancing bands alert me to any further action.

See Mr. Bolge's interview on YouTube for his take. It wasn't a rare event it was extremely overvalued equities and he indicated that that level of overvalue is extremely rare. If I misrepresented that I apologize.

Dandy
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Re: At what point do we market time?

Post by Dandy » Thu Jun 30, 2016 12:08 pm

When did Mr. Bogle get back in by the way? Did he ever change back to 80% stocks? If he never went back to 80% stocks, that changes the story significantly.
That, to my best recollection was not covered in the interview.

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HomerJ
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Re: At what point do we market time?

Post by HomerJ » Thu Jun 30, 2016 1:04 pm

Dandy wrote:
Should someone at 80% stocks have gone to 20% stocks last Friday?
I assume you are referring to Mr. Bogle. First, my buy on RBDs are modest and within my already established equity allocation bands. After 2 such buys in a row I stop and let normal rebalancing bands alert me to any further action.

See Mr. Bolge's interview on YouTube for his take. It wasn't a rare event it was extremely overvalued equities and he indicated that that level of overvalue is extremely rare. If I misrepresented that I apologize.
My point is that there are a LOT of events that appear to be "extreme", but turn out to be no big deal. You can't react on all of them. Greece debt crisis, U.S. possibly defaulting on debt, EU breaking apart. There's an "extreme" event every single year it seems.

A normal 70-year old should never have been 80/20 to begin with. Mr. Bogle is not really a good role model. He wasn't even following his own "age in bonds" rule.

Dandy
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Re: At what point do we market time?

Post by Dandy » Thu Jun 30, 2016 1:40 pm

My point is that there are a LOT of events that appear to be "extreme", but turn out to be no big deal. You can't react on all of them. Greece debt crisis, U.S. possibly defaulting on debt, EU breaking apart. There's an "extreme" event every single year it seems.

A normal 70-year old should never have been 80/20 to begin with. Mr. Bogle is not really a good role model. He wasn't even following his own "age in bonds" rule.
Bogle never focused on events he talked about rare extreme equity overvaluations.

Those who choose to focus on buying on dips buy when the equity market dips a lot over a short period. For me that is a day or 2 usually. It doesn't have to be an extreme event but it may - lots of lesser extreme events (if I can use that phrase) cause the equity market to take a plunge of a few percent and then usually bounce back some. I certainly don't react to all of them or even most of them but others may. I also don't put a lot of assets into the buys on dips some other might. You need to address your buy on dips/RBD issues to the specific poster since there isn't necessary a agreed upon approach used by the buy on RBDs club.

Mr. Bogle was and is not a normal retiree. What he does with his own portfolio reflects his own personal situation - he may have had a very aggressive portfolio because he was investing for heirs or charity. As I recall though he did a personal kind of head slap like what was I thinking when he made the large reallocation again because of health concerns, equity market extreme overvaluation and also because much safer bonds were paying a nice yield. I think the later reasoning was if long term equities return 9% and intermediate bonds are yielding close to that - why am I so heavy into stocks.

itstoomuch
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Re: At what point do we market time?

Post by itstoomuch » Thu Jun 30, 2016 4:50 pm

itstoomuch wrote:IMO
Near to retirement and after retirement.
Your timing may be very important.
For us, we were too late for 2001 and 2008.

I am mostly out of the Market at 66/69, discretionary account. I am sitting the next ~12 months out. Don't need the aggrevation. We got our Number and then some.

YMMV
I lied. I got back in [market] at Brexit, at least temporarily. Habit of seeing good values was irresistable. :oops:
Still have our number and then some. :happy

Additionally:
When you think you will make $$
When you think you can avoid losing $$$$
When you have other better alternatives.

YMMV :mrgreen:
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

MindBogler
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Re: At what point do we market time?

Post by MindBogler » Thu Jun 30, 2016 7:47 pm

HomerJ wrote: Again, are you using only data from 1900-1996? PE10 over 20 has been the norm since 1992. Basically, PE10 has been over 20 for 23 of the past 24 years.

Before that, every time PE10 got above 20, a crash soon followed. The only time PE10 had gotten over 25 in the past was 1929.

Believe me, anyone following PE10 in 1996, totally freaked out when it went over 25 in 1996. That was Great Depression numbers. It had only been seen once before. Schiller himself wrote a paper predicting 0% real returns going forward from the super high level in 1996. He was wrong.

PE10 has proven to be a terrible predicting tool. The last 25 years have been completely different from the previous 75. Who knows what the next 25 years will look like?
Sounds like a bunch of "this time is different" to me.

If I had a data set from 1900-1996 in front of me, it wouldn't be that hard to run a statistical analysis on it and calculate the mean and standard deviation. I don't even need to run the numbers to know that PE10 at 25, even in 1996, wasn't a 2-3 sigma event. I think you aren't fully understanding what a standard deviation (sigma) is. Just because a number in a data set has reached a peak value, that doesn't mean it is a 2-3 sigma or that it is even an abnormal result.

Let's make up numbers so that you will hopefully understand and stop beating this dead horse.

Let's assume that PE10 was normally distributed from 1900-1996 with a mean of 18 and a standard deviation of 4.

18+4 = 22 = 1 standard deviations (interesting)
22+4 = 26 = 2 standard deviations (hmm)
26+4 = 30 = 3 standard deviations (concerning)
30+4 = 34 = 4 standard deviations (wtf)

Anyway, why does it matter? We can't go back to 1996 and change anything so I am not going to bother and grab that limited data set. We know now that a 2 sigma is around 32. If you're wondering, I did some "google fu" to find that out. If we reach 40, I'm still de-risking. I will sleep better at night and I don't feel any further need to justify that decision to anyone other than myself.

Edit - I'm not content letting this rest, so I used the data on multipl.com, PE10 values reported January 1.
Image
When PE10 was 40+ on 1/1/1999, was that an abnormal event? When it hit 25 in 1996-1997, how many std deviations was it?

LibertyLover
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Re: At what point do we market time?

Post by LibertyLover » Thu Jun 30, 2016 9:32 pm

MindBogler wrote:
Edit - I'm not content letting this rest, so I used the data on multipl.com, PE10 values reported January 1.
Image
When PE10 was 40+ on 1/1/1999, was that an abnormal event? When it hit 25 in 1996-1997, how many std deviations was it?
We are currently at 26.11 PE10. If your numbers are correct (1900-1996)we are are over 2 standard deviations from the mean. That means statistically 98% of the time we should have a lower PE10. That doesn't sound so good. With that said, if the numbers were rerun from the 1990's the mean would be much higher.

MindBogler
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Re: At what point do we market time?

Post by MindBogler » Thu Jun 30, 2016 9:51 pm

LibertyLover wrote:We are currently at 26.11 PE10. If your numbers are correct (1900-1996)we are are over 2 standard deviations from the mean. That means statistically 98% of the time we should have a lower PE10. That doesn't sound so good. With that said, if the numbers were rerun from the 1990's the mean would be much higher.
I agree that it would be much higher from 1990-present but I am apprehensive about disregarding historical data prior to an arbitrary date. I prefer the longest series, 1881-present. So much has changed since 1881, a generation that lived the civil war, political upheavals, 2 world wars, confiscation of gold, the great depression, abandonment of the gold standard, S&L scandals, 1987, etc., and yet I can guarantee that human nature is much the same as it ever was. Why should "our time" be given any special regard? History is replete with examples of people thinking "this time is different" yet with the wisdom of hindsight we usually find that that notion was foolhardy at best.

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